The Hindu Business Line : Bubble babble

In financial jargon, ‘bubble’ means something that is inflated and eventually bursts. A look at some stocks that were very popular and, then, in true bubble-like fashion, burst.

Ajit Dayal

Everywhere I look, I see the word ‘bubble’ — quickly followed by the word ‘burst’ or ‘deflate’.

So what exactly is a ‘bubble’? Well, it used to be the sort of thing that one had in a hot tub bath when there was a lot of soap. But, now, water is not always available 24 hours a day and it is sort of wasteful to have a “bath tub” bath. A quick shower will do.

And the price of oil and coal and electricity is also ‘bubbling’ — that makes the hot tub bath an even more expensive experience.

In financial jargon, ‘bubble’ means something that is inflated — like your bath soap bubble — and eventually goes ‘phut’.

Respectable sales

Here are some stocks that were very popular and were owned by many portfolio managers and mutual funds and, then, in true bubble-like fashion, went ‘phut’.

Yahoo! was quite the junglee of the technology bubble (circa 1998 to 2000). The company still has a product that is widely used; so, while the bubble did deflate, the company has still managed to grow. For all its ‘bubbliness’ Yahoo has grown sales by a very respectable 45 per cent each year since 2001 and the stock is up some 5x in 6 years. Of course, if you were the unlucky enough to buy it in March 2000 at about $100 per share, well you are still sitting on a 75 per cent loss, eight years later.

A rough patch

In India, we had our share of tech-media-telecom bubbles. For those old enough to remember (and young enough to recall), there was Himachal Futuristic — the darling of the stock market and a media favourite. Well, they ran into a rough patch. An investment in HFCL in March 2000 would still leave an investor deep in the red today.

The interesting thing about HFCL is that it is not a one-time bubbler, but has a pretty good track record of bubbling and then ‘phut-in’.

The first bubble-burst event was in 1993-1994, with a repeat in 1999-2000, and then smaller little pops recently.

Perception can also cause a ‘bubble’. Sometimes, companies tend to do their business and the market gets all excited — and then depressed — over the perception of what the business is doing. Infosys is one such ‘bubble’ which, as of now, is not likely to be one that will burst (it better not, my clients own it!). But it does go through these massive emotional bursts of fear and greed — not necessarily the typical characteristics of a bubble. In a bubble, there is only greed — and little reality to back it. The fear does not lead to the sell-off of the stock. The realisation that there was only ‘hava’ causes the meltdown. The business is not a bad one — what investors were willing to pay for it was silly.

So even Zee was not a bubble, though from the graph it looks like one. Investors got greedy, they overpaid — there was a real business. It just did not deserve the valuation it got. (We do own Zee now for some clients.)

Frothy bubble

But bubbles are not linked only to technology, telecom, and media. The recent boom in the housing market in the US and in the financial sector, in general, resulted in an unnatural — or bubbly and frothy — environment in which forecasts were always rosy.

Take the case of Countrywide Financial, a company that gave loans to buy homes in the US. The loans were — as it turns out — given too aggressively and without much correct assessment of whether the borrower could service the debt taken to buy the home. The ‘bubble’ in the US housing market helped the share price of Countrywide. But when that deflated, that familiar ‘phut’ sound was heard all over again.

India will have its fair share of financial stocks that will emanate that ‘phut-ing’ sound. Check out the graphs of a few and you will know what I mean.

Well, we don’t quite know what bubbles really are. We cannot seem to define it but, suffice it to say, that if it looks like a bubble it probably is one — and if it smells like a bubble it definitely is one.

(Sourced from www.quantumamc.com)

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